Revenue management: Back to basics

May 5, 2010

Assessing what revenue management is at the most basic levels – understanding, anticipating and influencing – and how these principles can be leveraged to create a successful revenue management strategy.

Published: 05 May 2010

Assessing what revenue management is at the most basic levels – understanding, anticipating and influencing – and how these principles can be leveraged to create a successful revenue management strategy.

By Jean Francois Mourier, RevPAR Guru

Ask any hotel general manager (and certainly every revenue manager) and they’ll explain exactly how important revenue management is to running a profitable lodging enterprise.

Yield management, as it was once called, reflects a proactive approach to the business of making money through the sale of rooms, and mitigates some of the unavoidable complications arising from the fixed and highly perishable nature of hotels’ core products. Though relatively new (revenue management has only enjoyed widespread use within the hotel industry since the early 1990s), most hotel executives would find the notion of operating a hotel without a comprehensive revenue management strategy inconceivable.

And rightly so. Revenue management has revolutionised the hotel industry, taking the post-and-pray nature of static rack-rate pricing out of the picture, helping to unify disparate strategies, and forging beneficial linkages between crucial hotel operating departments. Running a hotel without it would be returning to the crude tools of yesteryear.

But because revenue management is a complex practice that incorporates many different disciplines and stretches across many distinct departments within a hotel, it’s sometimes easy to overlook the basics concepts that undergird it. At its core, revenue management is about understanding, anticipating and influencing customer behavior, with the end goal of increasing revenues for a property. Focusing exclusively on the supporting functionalities of revenue management- like pricing, channel management, or inventory control- and neglecting the principles that serve as the foundation of revenue management is like not seeing the forest through the trees.

This is not an isolated occurrence; many managers and executives dwell on the details of revenue management. A 2008 Cornell Hospitality Report survey found that revenue management is largely viewed as a technical and quantitative process, with pricing strategy as a strong element. But the technical aspects of the process are nothing without an aim to guide them- and that aim is a little more nuanced that making more money.

So let’s go back to the basics of revenue management. The most logical starting point is a definition.

What is Revenue Management?

To use the American Hotel and Lodging Educational Institute’s definition, revenue management is “a set of revenue maximization strategies and tactics meant to improve the profitability of certain businesses.” This definition purposely leaves the complex multidisciplinary aspects of the process vague, to emphasize its ultimate goal: improving profitability. It is complex because it involves several aspects of management control, including rate management, revenue streams management, and distribution channel management, just to name a few. Revenue management is multidisciplinary because it blends elements of marketing, operations, and financial management into a highly successful new approach.

Perhaps the best definition is Wikipedia’s: revenue management is the process of understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable resource (such as airline seats or hotel room reservations). This encapsulates both the overarching goal of the process, and its crucial relationship to consumer behavior. What is revenue management except a means to mold consumer behavior in a way that benefits the hotel?

Understanding

The first step in this long and ongoing process of encouraging consumer behavior that is beneficial to the hotel is understanding consumer behavior in the first place. What motivates a potential guest to book a room at one hotel as opposed to another, or at one price and not another is an essential concept to grasp. Though this can be conjecture, the relationship between pricing and booking pace (and that of a hotel’s competitors) is easily measured, and elucidates the same set of behaviors. Selling a room to a guest at the right price to both maximize occupancy and the revenue it generates is impossible without first considering what will prompt a consumer to make the purchase. It is very easy to understand the consumers buying habits if you are able to collect a property’s purchasing data, analyze it and then read and interrupt the data in real time. This is easier said than done, but very possible if you have the right system in place.

Anticipating

Once an understanding of consumer behavior is gleaned- both in a general sense and specific to the property and the property’s competitors- then management can begin to anticipate that consumer behavior. This is where the real challenge or revenue management emerges: being as accurate with this anticipation as possible, through forecasting, modeling, and exhaustive research. Only when consumer behavior is at least partially anticipated can a hotel hope to sell and distribute their room inventory effectively, which is how revenue management leads to higher revenues and profitability. Once all of the data is collected and analyzed a pattern will begin to form. This pattern will constantly change and evolve just like any market. The key is to have a system in place with Artificial Intelligence (AI) that can understand and adapt to these changes in real time.

Influencing

The last, and most critical aspect of revenue management, is actually influencing consumer behavior. If a hotel can understand and anticipate a consumer’s decision, then the next logical step is to guide that decision in a direction that is beneficial to the property. In terms of selling rooms, exerting influence is largely a function of presentation and sales channel distribution, in an effort to display a room to a customer at the price most likely to incite them to buy (while simultaneously being the price that earns the most revenue for the hotel in that situation). The process of influencing consumer behavior is the capstone of revenue management; it is supported by understanding and anticipating consumer behavior, but in the end it is all the only visible result of a revenue management strategy. Once you have collected and analyzed all of the data, it will be simple to implement the findings into your revenue management processes. By doing so, it will provide you with a huge competitive advantage in the market, thus helping you capture a bigger share of the market.

Of course, being capable of executing the technical aspects of revenue management is crucial to the success of any revenue management strategy. The ability to modify prices in a real time environment, effectively manage inventory, balance and optimize sales channel distribution and facilitate cross-departmental cohesion are important nuts and bolts of the revenue management machine; it won’t function without them. But neither will it work without an understanding of the fundamental principles of revenue management.

So remember: Understand, anticipate and influence. These are the fundamentals of revenue management and the keys to a hotel’s financial success.